Summary of a Recent
Judicial Development in
Finance & Credit

Mortgagee Has Three-Month Redemption Period after Receiving
Late Notice of a Tax Lien Against Collateral

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In United States v. Sayer, 450 F.3d 82 (1st Cir. 2006), the First Circuit Court of Appeals vacated a foreclosure judgment in favor of the government (on behalf of the Farm Service Agency), holding that the Agency's failure to act after it had received notice of a municipality's tax lien against property it held as collateral divested it of its interest in the property.

Background

The Sayers borrowed money from the Farm Service Agency's successor agency, using their real property as collateral. Id. at 84. They later filed for bankruptcy, and after making payments to the FSA for three years, they defaulted on their obligations. Id. They had also failed to pay property taxes, and the town of Canton, Maine foreclosed on their farm and sold it to the Reisners by quit-claim deed for far less than its actual value. Id. The government brought a foreclosure action to recover amounts due under the Farm Service Agency mortgages, naming Reisner (as the sole owner) and the Sayers as defendants. Id. at 84-85. The district court determined that the FSA held a valid lien on the property and allowed it to foreclose, and the defendants appealed. Id. at 85.

Arguments

Reisner argued that the FSA's three-month period to redeem the property had expired and so it had no interest left to foreclose. Id.

The Sayers argued that assuming they owed anything, they did not owe as much as the government claimed, and that they had been denied access to records that would allow them to determine the amount that they owed. Id. at 88.

The government argued that as a mortgagee that had not received the statutory notices, it could maintain its mortgages against Reisner without having to comply with the three-month redemption provision, so long as it refunded to him what he had paId. Id. at 86.

Analysis and Holdings

Under Maine law, at the time of the recording of a tax lien certificate in the registry of deeds, the tax collector is required to send notice to the taxpayer and any mortgagee of record, and the municipal treasurer must notify the taxpayer and mortgagees of record 30 to 45 days before the automatic foreclosure date. Id at 85. The FSA did not receive such notice. Id. The statute also provides that a mortgagee who does not receive notice has the right to redeem the property within three months after receiving actual knowledge of the recording of the tax lien certificate. Id. at 85-86. The government conceded that the FSA did obtain actual knowledge of the tax lien and foreclosure at some point during the redemption period, but failed to act. Id. at 86. The court saw no reason that the FSA should not be expected to act within three months once it had actual knowledge of the tax lien, and held that its failure to act effectively divested its mortgage interest. Id. at 87. However, that did not mean that it has lost its claim against the Sayers for the unpaid balance of their loans. Id. at 88. The court found that the district court did not err in its determination of the amount actually owed by the Sayers. Id. at 90. The court therefore vacated the district court's order of foreclosure as to the real property, and affirmed the judgment declaring the actual amount owed to the government by the Sayers. Id. at 91.

The case was decided on June 13, 2006.